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Lost in Translation: Making Sense of Renewable Energy Strategies

An increasing number of enterprises are focused on going 100% renewable, driven in large part by the recent push to established science-based carbon reduction goals. Three of the supporting energy strategy trends to help enterprises achieve these goals are Power Purchase Agreements (PPAs), Virtual PPAs, and Renewable Energy Certificates. None of these is probably a term that comes tripping off the tongue of the average businessperson.

But understanding these wonky terms can be essential to fully appreciating the benefits of a holistic energy strategy through the lens of what matters most to the enterprise – finding cost-effective and achievable ways to save on energy costs. Let’s drill into the essence of what every person tasked with driving an enterprise renewables push needs to know by comparing the technical definition with the resulting real-world business benefits.

First up is Power Purchase Agreement (PPA)

Wikipedia defines a Power Purchase Agreement as a contract between two parties, one that generates electricity (the seller) and one that is looking to purchase electricity (the buyer). The PPA defines all of the commercial terms for the sale of electricity between the two parties, including when the project will begin commercial operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and termination. A PPA is the principal agreement that defines the revenue and credit quality of a generating project and is thus a key instrument of project finance.

Business Translation:

Instead of buying power from a utility or a competitive energy retailer as most businesses have traditionally done, an enterprise can now buy power from a company that will do things like install a solar panel on your roof or a wind farm on your property. In a PPA, the “seller” builds or installs the solar panel/wind farm, and the “buyer” buys the power that’s generated from these renewables.

Virtual Power Purchase Agreement (or VPPA)

A virtual PPA offers enterprises a price hedge against the volatile swings in energy prices to lock in costs over the course of years. A company agrees to pay a renewable energy project developer an agreed-upon price over an extended timeframe (typically over a 10-25 year horizon) while continuing to purchase power from the local grid. The renewable energy project generates and sells power onto the grid and pays the enterprise the difference if the electricity is sold into the market above that agreed contract price. The Rocky Mountain Institute describes in this blog post how Yahoo! is leveraging VPPAs as part of its use of wind power.

Business Translation:

In a virtual PPA, the company that has installed a solar array or built a wind farm sells that power to the grid. A third party – the company that enters into the VPPA with the seller – says, for example, “I guarantee that you will sell your electricity for $0.025.” If the company sells its electricity to the market for less than that price, the third-party company pays the difference. If the seller happens to get a higher price, the company that bought the VPPA will actually make a profit. The other important component is that the person who buys the PPA also gets to keep the renewable energy credits. So what does this mean in practical terms? It’s one way that companies can go “100% renewable” without ever putting in onsite renewable generation.

Importantly – in this scenario, only the company that purchased the VPPA gets the renewable energy certificates. Even if someone else actually buys the power generated from that particular wind or solar installation, only the buyer of the VPPA gets the credit.

Renewable Energy Certificates (RECs)

Wikipedia defines Renewable Energy Certificates (RECs) as tradable, non-tangible energy commodities in the United States that represent proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource and was fed into the shared system of power lines which transport energy. Renewable Energy Certificates provide a mechanism for the purchase of renewable energy that is added to and pulled from the electrical grid.

Business Translation:

Power on the grid comes from a variety of sources including coal, nuclear, natural gas, and renewables. Once it’s on the grid, all this power is blended together. As an end user, a business can’t really determine where that exact megawatt hour they’re using comes from. RECs offer a way for businesses to ensure that for every megawatt hour of energy that business has consumed, their utility has purchased or generated at least that much from renewable energy sources.

Conclusion

You may not find yourself talking about PPAs, Virtual PPAs or RECs at your next cocktail party (or then again you just may, as these strategies increase in popularity in the business world). Understanding these terms and their implications on your company’s renewables strategy will help an organization full leverage the range of benefits – including environmental impact and economic opportunities – of a modern approach to sustainable energy.